Detractors Cite Pitfalls Of Chartering

Detractors Cite Pitfalls Of Chartering

Despite its touted advantages, the idea of optional federal chartering has left several insurance company groups lukewarm at best.

Monte Ward, vice president of federal affairs for the National Association of Mutual Insurance Companies in Indianapolis, said that NAMIC is “interested in the debate” and will participate in it to make sure its voice is heard.

However, he stressed that while NAMIC has not strictly opposed federal chartering proposals, the group's principal goal remains the reformation of the state regulatory system to ensure that it operates “as efficiently as possible.”

Similarly, Carl Parks, senior vice president of federal government relations for the Des Plaines, Ill.-based National Association of Independent Insurers, said the NAII is “keeping an open mind” while analyzing all federal chartering proposals that come along.

At the same time, the NAII supports state regulation and opposes “further federal intrusion into the natural role of the states,” he declared.

Rodger S. Lawson, president of the Alliance of American Insurers, based in Downers Grove, Ill., said his group believes that federal chartering is “not the right solution” or “a worthwhile option” for the property-casualty industry.

Mr. Lawson said so-called optional federal chartering actually creates “a dual regulatory system[that] isn't truly an option one way or the other.” As an example, he noted that the bill introduced by Sen. Charles Schumer, D-N.Y., recognizes the continuation of state regulation over several areas of insurance. “As a result of that, we dont think there's any efficiency gain,” he concluded.

The NAII acknowledges that several states still have work to do to modernize their systems of regulating insurance, said Mr. Parks. This will require regulatory change, legislative change or even staff changes at some state insurance departments, he added.

But while recognizing that “the states don't have forever to accomplish this reform,” according to Mr. Parks, the NAII believes that the states have not had adequate time to do this.

Another view shared by the three insurer groups is that there is no convincing evidence that, in Mr. Lawson's words, insurance regulation “would be better at a federal level than it is at the state level.”

As noted by Mr. Ward, “when you look at things like Enron or the savings-and-loan crisis, the federal system hasn't proven to be a very good regulator of those kinds of things.”

For NAMIC, this means that proponents of federal chartering must “prove first that the federal option is a better option, which to this point they can't do,” Mr. Ward explained.

Mr. Parks said history bears out that “federal regulation can have negative and unintended consequences.”

Mr. Lawson added that a state regulatory system “provides some diversification of what I would call regulatory risk.” He explained that under a federal regulatory system, if a “bad or poor” regulatory decision were made, the entire industry across the country would be negatively affected. But this does not happen under the current state regulatory system, he observed.

The three groups also agreed that another benefit of state regulation is its proximity to the insurance consumer. “Certainly in the case of property and casualty [insurance], it's much more appropriate to have regulation be close to the people that you're doing the regulating for–the policyholders, etc.–and it's much easier to do that from a state capital than it is from Washington, D.C.,” observed Mr. Parks.

As for the argument that optional federal chartering allows insurers to get products to market faster, Mr. Lawson called this “a theoretical construct, not reality” because there is no proof that “federal regulation would allow products to get to market any faster than they currently get there today.”

Finally, Mr. Parks questioned the wisdom of congressional involvement in the federal chartering issue at this time. He said that the NAII sees no urgent need in the economy or the insurance industry for the introduction of federal chartering legislation “while the Senate is sitting on badly needed [terrorism reinsurance] legislation.”

The NAII hopes that federal chartering will not distract Congress “from what they really in our estimation need to do, and that is to get that terrorism reinsurance bill passed and sent to the President,” Mr. Parks stated.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 28, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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